Sydney

Property owners should restructure leases before expiry to capture value when the market rebounds

2009-06-17T05:00:00Z

When the market turns, the bounce out will be quicker and stronger than in previous downturns

SYDNEY, 17 JUNE 2009 – Commercial property owners should position themselves now for the next market upswing and look for key market turning points and restructure leases to capture value when the market improves.

National Head of Leasing for Jones Lang LaSalle, Kevin George said taking a view on market turning points was critical for lease structuring and this should be front of mind for owners in the current property cycle.

“Against a backdrop of slowing demand, landlords are anxious to maintain occupancy levels, providing an environment for tenants to negotiate more favourable lease agreements.

“When the market turns, it is expected that the bounce out will happen quickly and be stronger than in the 1990’s downturn due to the low vacancy factor and a moderate supply outlook.

“There is no doubt that it is currently a tenants’ market, but the market pendulum will move back in the landlords favour. We expect the balance of power to remain with tenants until late 2010, but the medium term outlook is that it will begin to favour landlords again in 3-5 years,” Mr George said.

“It is important that landlords build in market reviews to recapture value in the latter part of leases when economic conditions are expected to improve, the property market recovers and vacancy rates tighten. On current forecasts, we expect vacancy to reach a cyclical peak in late 2010 / early 2011 and rental growth in the financial centres (Sydney and Melbourne) to accelerate in 2012,” Mr George said.

National Office Analyst for Jones Lang LaSalle, Andrew Ballantyne said that vacancy spikes in Australian office markets are typically supply led.

“At the end of 1Q09, the national CBD supply pipeline equated to 8.7% of total stock. This compares with 22% in 1989. The over-supply in the early 1990s led to the office market having indigestion for the bulk of the decade.

“In this cycle, the credit crunch was the remedy, arriving at the right time to prevent an over-supply in CBD office markets. Jones Lang LaSalle medium-term supply additions (2011 – 2013) projections were 1.26 million sqm at the end of 2007, compared with 585,000 sqm in 1Q09.

“The national vacancy rate is expected to peak at between 10% and 12% by early 2011, but this is nowhere near the levels experienced in the 1990’s downturn, where vacancy levels approached 22%. If the credit crunch had not curtailed the medium-term supply pipeline, the market could have been facing a vacancy peak of 14% to 16%.

“With a moderation in supply expectations, the main market risk is in the demand outlook. The weaker demand environment is reflected by tenant contractions and rising sub-lease availability, however the impact of negative absorption figures on CBD markets is over-emphasised,” Mr Ballantyne said.

Since Jones Lang LaSalle commenced detailed monitoring of CBD office markets in 1970, there have only been five years of negative absorption. The weakest market was in 1991 and 1992, when negative absorption totaled 2.5% of total stock, therefore the vacancy escalation from 5.8% (1989) to 21.2% (1992) was predominately supply-led.

“Owners may be experiencing a winter of discontent, but unlike the 1990s, spring will arrive quicker and lease restructuring will assist in capturing value lost in the current downturn,” Mr Ballantyne said.